Transfer pricing. Is it a crime?

A leading authority on corporate accounting has said that the Australian government might be loosing a billion dollars a year in lost tax due to the way multinational firms operate.

When firms operate in more than one country they can often decide where to report their profits by using transfer pricing. Not surprisingly when given this option firms decide to report their profit in the country with the lowest tax rate.

The example of Starbucks is well known. Starbucks sell coffee in many countries. However they report a lot of their profits in Switzerland. This is because the Swiss subsidiary of Starbucks sells the coffee to other Starbucks companies at a high price. The Starbucks in other countries therefore make very little profit on the coffee. 

Of course the coffee never really enters or leaves Switzerland. The Swiss company simply handles the processing of invoices. Starbucks benefit from the low Swiss profit tax and overall the Starbucks corporation gets to keep more of its profits.

George Rozvany goes further by saying the big four accounting firms assist multinational companies in this legal, but unethical practice. This is a different point, but the way the accounting firms operate is certainly open to criticism.

The implications for Australia is that they are losing tax revenue. With most governments running budget deficits that's a pressing issue. 

Is transfer pricing unethical? That's a good question. Many think it is, but if it was banned in Australia would this lead to lower overseas investment and so affect growth and employment adversely?

When talking about the benefits of free trade and the free movement of people and capital, we also have to consider some of the costs.

The ABC cover the story here

This story has direct relevance to Australian Budgetary policy, It also applies to International Trade and Fiscal policy for IB students.